Portable Mortgages: What are they? How do they work?
Portable Mortgages. Along with Assumable Mortgages, present a lot of confusion as to where they apply and what savings are really available by using them. This article will cover off the portability option, and its restrictions.
First, a portable mortgage is best described as your mortgage as luggage that you carry from property to property. As long as you don’t need larger luggage to outfit a larger home, it works wonderfully. Any deviations from this complicated analogy, and portability doesn’t help too much.
Portability in a mortgage allows you to take your current mortgage, at current rates, and transfer it to another property. So, for example, if you have a condo worth $300,000 and a mortgage of $200,000 and you sell the condo and buy a larger one, you can transfer the mortgage to your new property that you are buying. You will get to preserve the rate, amortization, and term of your mortgage all without paying a penalty to break the term. In times of rising rates, this is a great option as you get to preserve your old lower rate without penalty.
However, if you are buying a larger or more expensive property, and require a larger mortgage, then portability’s benefits become murky. For example, if you “port” your mortgage to your new home, but it is $500,000 you would be short $100,000 from the sale of your old home. Where does this $100,000 come from? Either you have to have it in CASH (savings of some sort) or you have to borrow it.
Here is where things get confusing. If you are paying 3.75% on your old $200,000 mortgage, and you need another $100,000 but rates have risen to 4.75%, then what rate are you paying?
The answer: it depends on your lender.
Some lenders (not many anymore) allow you to do a “blend and increase” whereby you get the new dollars at the current rates, but keep your old dollars at the old rates. This results in some “blended” rate in between
the two. Knowing which lenders allow this and which don’t is difficult and an ever-changing piece of information that you will require a mortgage broker to assist you with.
If your lender allows blends and increases, then you are fine, right? Maybe not.
There is a further complication: what is the amortization length of your mortgage left? If, for example, you originally took a 25 year term, and 2 years into the mortgage you need the additional dollars, that leaves only 23 years amortization. If you can’t “qualify” with your bank for the dollars at the short amortization, then you can’t do the blend and increase. If you can qualify, then you don’t have anything to worry about, but your payments will be higher than they need to be.
A further option is a “blend and extend” whereby you get a blended rate between new and old, and extend your term. In some cases you can even extend your amortization back out to 25 or even 35 years. Most lenders USED TO allow this, but in this tightening market, many are not doing blends and increases, blends, or blend and extends. You have to talk to a qualified mortgage broker to determine who is, and who is not doing ports and blends as discussed.
So how useful is portability? In my opinion it ranks right up there with assumability, which falls in the “nice, but not that great” category of mortgage “frills” that are available.
It is rare that a client can do a straight port without needing more money, less money, or a longer amortization. And with rates falling through the floor, and banks taking a beating everywhere, look for further curtailments of this program as banks try to capture profit through enforcing penalties on their clients.
This entry was posted on Wednesday, February 25th, 2009 at 3:13 am and is filed under Basic Mortgage Info. Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response. or trackback from your own site.